Heineken, the Dutch beer giant, has remained silent in the face of criticism it has not pursued opportunities in the global acquisition market in the way its rivals Interbrew and SAB have done in the last year. But a spate of smaller targets have been swallowed in a month and the company is well positioned for more. Chris Brook-Carter reports. 

The story goes that the founder of the Dutch beer giant Heineken, Gerard Heineken, was able to afford to buy his first brewer by convincing his mother (who was also his financial backer) that the drunken crowds of Dutchmen that so appalled her every Sunday morning would decrease if Holland had a good brewery. His argument, it seems, was that drunkenness would decrease if people drank beer instead of gin, however there were no good beers in Holland.

His powers of persuasion were enough to convince his mother and by 1863 she had put up the money to buy De Hooiberg (The Haystack), a 271-year-old brewery in Amsterdam. Within ten years Gerard was proving a success and established a brewery in Rotterdam, which he named Heineken in 1873, and three years later he was exporting to France.

Gerard's entrepreneurial talents continued to run through the company and by 2001 the Heineken Group was the world's third largest brewer and Europe's number one, operating in over 170 nations, employing over 40,000 people and continuing to drive sales of its brands, in particular its eponymous Heineken beer.

In many ways Heineken was Europe's answer to Anheuser-Busch, its motto seemingly
"think global, drink local," with the company's strategy driven by the sales of its flagship brand. Heineken's strategy in creating new markets is clear. The brand muscles its way into the local market through exports and once significant volumes have been picked up local production begins. And while in 2001, 70% of Heineken's sales were accounted for by Europe, the company does have a truly global reach.

Heineken has several operating partners in regions where it is trying to increase its presence. Operations in Asia/Pacific are conducted through Heineken's alliance with Fraser & Neave, under the name Asia Pacific Breweries. In Latin America, Heineken is the most widely available international brand and is produced under license in Argentina, Brazil, Costa Rica and Chile by Quilmes. Heineken also operates in Brazil through Kaiser. In the US Heineken is a leading brand in the profitable imported category, while in Africa, the company is now well established. A new brewery was opened in 2001 in Nigeria, making six in total.

"It (Heineken) operates in tandem with a number of other brewers on this continent (Africa)," says Canadean in its Company Watch on Heineken, "although when the time is right it will no doubt seek to purchase more equity in key operators in a bid to obtain greater control."

And the company did not sit still in 2001 in other countries either. "The acquisitions of Bravo in Russia signalled Heineken's firm intention to make moves into this strong growth market," says Canadean. This expansion was echoed through the construction of new breweries in Vietnam and increased stakes in operations in Spain, Poland and Belgium.

"Extra volume will provide a growth market with more opportunities for sales while the added value will be seen almost immediately," explains Canadean.

Heineken's pedigree is second to none in the beer world. And yet in the last 12 months serious concerns have arisen that the company has begun to lose its way. Primarily this has been a matter of perception, driven by the company's fall down the list of global brewers. Most significantly Heineken has now lost its prized position as Europe's top brewer to Scottish & Newcastle. But it is also falling on a world scale as the likes of SAB, Miller Brewing and Interbrew make significant gains in market share through major acquisitions and mergers.

"Heineken has long been expected to make an acquisition," said WestLB Panmure beverage analyst Stuart Price recently. "Its balance sheet is over-capitalised; some commentators feel that Heineken has missed out on recent opportunities . However, Heineken refuses to overpay for assets and is more interested in making an acquisition which helps to consolidate a position in a market in which it already operates. It does not want to pay a premium for an acquisition which gives it an entry into a new market, where there are a lack of synergies."

In the current economic climate caution certainly has its place. But after Heineken delivered only 2% organic growth at its recent first half results the calls for a major deal were increased. 

"Organic growth of just 2% will disappoint and increase pressure for management to seek acquisition growth," said Price said at the time.

He went on: "We continue to believe that the lack of growth means that Heineken must make an acquisition."

Intriguingly Heineken responded to these calls in aggressive fashion, but not in a way most onlookers had anticipated or hoped for. Rather than the transforming deal needed to bring it level with the likes of SABMiller, Heineken revealed it was making a £287m bid for the Egyptian brewer and drinks company, Al Ahram Beverages Co, known as ABC.

"This acquisition will provide Heineken with a virtual monopoly position in Egypt," said Price after the announcement. "However, our concerns about Heineken are centred on the slowing topline and EPS growth. In our opinion it needs to deliver a substantial deal in order to remedy the situation, this deal is relatively insignificant in the bigger scheme of things."

Heineken did not announce a significant deal, but in the space of a few weeks it unveiled another four bolt on acquisitions, including stakes in the Central American brewers Florida Bebidas and Consorcio Cervecero Centroamericano for approximately US$229m. There was a controlling interest in Almaza, Lebanon's only brewer - the Dutch beer group will acquire a 69% stake in the Lebanese brewer to add to the 10% stake it already holds. And finally at the beginning of October Heineken, made a $56m bid for the Panamanian brewer, Cervecerias Baru-Panama.

The first four of these deals are for virtual monopolies in the countries they operate in and will therefore more than likely be very profitable, if small, investments. The final deal, while considered expensive, has answered worries that Heineken was being squeezed out in Latin America as Ambev formed partnerships with Heineken's ally Quilmes and Molson bought the Dutch group's Brazilian partner Kaiser.

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"We have contended that in order to remedy its slowing topline and earnings growth rates Heineken needs to deliver a significant deal or a series of smaller deals. The company is pursuing the latter," said Price after the first four deals were announced. "Following a number of small deals this year the Heineken strategy seems to be to make small but profitable investments in growth markets where they do not have to overpay for assets. While none of these deals is capable of transforming the slowing growth profile and will not have a material impact on profitability they do look like reasonable deals on paper."

Worries still do persist, in particular over Heineken's announcement that in 2003 it would be reducing marketing spend as a direct proportion of sales for the first time in five years, and in the UK where its failure to acquire Carling has left it exposed. But the company is well positioned for further acquisitions so expect the spending spree to continue.